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America's Favorite Grocery Stores: How to Profit

A few supermarkets are printing money these days. Here's how you can profit from the gains.

There's a subtle but decidedly positive shift happening in supermarket aisles right now. You might have noticed it on your latest weekly run: The store is busier, shoppers seem happier, and more premium products are filling up their carts.

Yes, the mood is improving at America's favorite supermarkets. And that's not just thanks to the catchy 90s music pumping through the store speakers.

"Our customers are increasingly positive about the economy since the start of the new year," Kroger(NYSE:KR) CEO Rodney McMullen said this month after his company posted blockbuster earnings results.

Big budget commitmentGroceries take third place in the average family's budget, behind only housing and transportation costs. A typical household spends over $300 each month buying food for the home, which is more than we spend on healthcare, entertainment, or clothing. And that average marches higher with income gains: The wealthiest families spend as much as $500 a month on groceries.

That budget commitment is rising, too. Americans report dedicating more spending to groceries and less to eating out at restaurants. Sure, that shift could just be a lingering hangover from the recession. But it also could be evidence of a long-term move toward eating at home. Either way, grocery stores promise to remain the one retailing shop where we dedicate the largest portion of our spending each month.

Three ways investors can profitWhole Foods' stock is one good way for investors to gain exposure to those positive economic trends. After struggling with customer defections last year, the self-proclaimed "healthiest" grocery store in America decided to invest heavily in cutting prices.

That value strategy paid off quickly: Whole Foods just posted its third straight quarter of accelerating traffic growth. The grocer's 5% comparable-store sales gain last quarter was powered more from customer traffic improvement (3%) than from higher average spending (2%). That points to more record results ahead as Whole Foods seeks to eventually triple its store base to over 1,200 locations.

Or you might consider Costco(NASDAQ:COST) a great long-term play on the eating-at-home market. After all, the warehouse giant dominates competitors in the single most important retailing metric: shopper satisfaction.

Costco's membership renewal rate climbed by a full percentage point last year to reach 91%, and it led all retailers in a recent survey by the American Customer Satisfaction Index. Happy Costco members helped power a whopping 8% comps gain last quarter, and they provided management with more financial ammunition to devote toward increasing capital returns to shareholders.

But my favorite grocery investment right now is Kroger, which just posted its 45th consecutive quarter of sales growth. For over a decade, Kroger has been stealing market share from rivals -- mostly Wal-Mart. And these days, it has it sights set on the fast-growing organic sector. Kroger's in-store natural foods brand, Simple Truth, achieved over $1 billion of sales in 2014 after having launched less than two years ago. Kroger expects more double-digit growth out of that franchise, which has helped it even outgrow Whole Foods over the last four straight quarters.

Source: Company financial filings.

Kroger's stock has reacted to all of that business success. Shares are up 250% in just the last five years. However, that jump still leaves the grocer valued at a discount to both Costco and Whole Foods. Investors have to pay over 30 times trailing earnings for either of those companies, but a more reasonable 22 times profit for Kroger right now.